Chicago Atlantic BDC Q1 2024 Earnings Call Transcript

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Provided by Quartr
May 10, 2024

Key Takeaways

  • Positive Sentiment: Silver Spike signed a definitive agreement on February 20 to acquire a loan portfolio from Chicago Atlantic in exchange for stock, filed a Form N-14 on April 15, and expects the deal to close by mid-2024, bolstering its asset base.
  • Neutral Sentiment: Q1 gross investment income rose to $2.8 million from $2.5 million a year ago, but $2.1 million in transaction costs drove net investment income to a $0.1 million loss, with NAV per share at $13.60.
  • Positive Sentiment: The portfolio of nearly $55 million carries an average 18% yield to maturity, is 100% first-lien or secured bonds, and is over 90% floating rate, ranking favorably against BDC peers.
  • Positive Sentiment: Origination efforts remain robust with an active pipeline exceeding $425 million and ongoing dialogues with top cannabis operators pursuing growth capital.
  • Neutral Sentiment: DEA’s proposed rescheduling of cannabis to Schedule 3 promises 280E tax relief and improved borrower cash flows, but the company expects little near-term shift in lending dynamics or capital availability.
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Earnings Conference Call
Chicago Atlantic BDC Q1 2024
00:00 / 00:00

There are 5 speakers on the call.

Operator

Good day and thank you for standing by. Welcome to Silver Spike Investment Corporation First Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Umesh Mahajan, Chief Financial Officer.

Operator

Please go ahead.

Speaker 1

Good morning. This is Umesh Mahajan, CFO of Cyrosbank Investment Corp. With me here today is Scott Gordon, CEO of Silver Spike Investment Corp. Welcome to Silver Spike's earnings conference call and live webcast for the Q1 ended March 31, 2024. Silver Spike's financial results for the Q1 ended March 31, 2024 were released yesterday and can be accessed from our website atssific.

Speaker 1

Silverspikecap.com. A replay of the call will also be available on our website. Before we begin, I would like to remind everyone that certain statements that are not based on historical facts made during this call, including any statements related to financial guidance, may be deemed forward looking statements under federal securities laws, Because these forward looking statements involve known and unknown risks and uncertainties, there are important factors that could cause actual results to differ materially from those expressed or implied by these forward looking statements. We encourage you to refer to our most recent SEC filings for information on some of these risk factors. Silver Spike assumes no obligation or responsibility to update any forward looking statements.

Speaker 1

Please note that the information reported on this call speaks only as of today, May 10, 2024. Therefore, you are advised that time sensitive information may no longer be accurate at the time of any replay or transcript reading. So good morning again and thank you all for joining. We released our results yesterday along with our 10 Q and there is a management presentation deck attached to the 8 ks that was filed and made available this morning. Those who have joined us on this earnings webcast should also see a link to the slides that we will use for our discussion today.

Speaker 1

We may refer to the slides by numbers for your reference. I'll cover the presentation slides and then turn it over to Scott Gordon for his thoughts and remarks. Before we get to the financial highlights for the quarter ended March 31, 2024, a quick recap about the loan portfolio acquisition that we announced in this quarter. On February 20, 2024, the company announced that it entered into a definitive agreement to purchase from Chicago Atlantic Loan Portfolio LLC, a portfolio of loans in exchange for newly issued shares of the company's common stock, subject to certain customary closing conditions. On April 15, 2024, the company filed a registration statement on Form N-fourteen in connection with this loan portfolio acquisition with the Securities and Exchange Commission SEC.

Speaker 1

We are currently anticipating this transaction to close in mid-twenty 24. With that, turning to Page 3 of the presentation for financial highlights for the Q1 2024. The gross investment income for this quarter was 2,800,000 dollars compared to $2,500,000 in the Q1 last year. Expenses of approximately 800,000 dollars excluding the expenses related specifically to the loan portfolio acquisition. Results in investment income excluding transaction expenses of $2,000,000 compared to $1,400,000 last year.

Speaker 1

We have incurred transaction related expenses of $2,100,000 in the quarter as the definitive agreements were signed in this quarter. Net investment income of negative $100,000 net assets of $84,500,000 down from last year due to the payment of dividends and the transaction expenses. On a per share basis, the investment income excluding the transaction expenses was $0.33 per share compared to $0.22 per share last year. The net investment income was negative $0.01 per share and net asset value at the end of the period as of March 31, 2024 was $13.60 Also, the Board declared a regular quarterly cash dividend of $0.25 per share. This dividend will be payable on June 28 to stockholders of record on June 20.

Speaker 1

We will not really go through the subsequent few slides in the slide deck in detail as we have covered them in the past and most investors are already familiar with our story. But turning to Page 9, to talk about our origination efforts. Our deal pipeline remains strong. In general, since last quarter of 2023, many of the potential borrowers in the industry have not rushed into borrowing money as they were watching the interest rate movements in the credit markets as well as the developments on the rescheduling of cannabis to Schedule 3. We view that time period towards due diligence and underwriting of our 25 borrowers as a part of our loan portfolio acquisition that we announced.

Speaker 1

And at this point, as the industry continues to grow, good operators in the industry have started revisiting their growth and expansion plans and have started thinking about raising more capital to support their plans. We have an active dialogue with many of the best operators in the industry and have an active pipeline of over $425,000,000 On Page 11, we show our portfolio summary as of March 31. Similar new investments in this quarter, as you can see at the top of the page, we have over $54,000,000 almost $55,000,000 invested with an average yield to maturity of about 18%. A few points we'd like to reiterate about this portfolio. 1st, all of our positions are 1st lien loans or secured bonds.

Speaker 1

None of these loans or bonds are in on accrual status. Over 90% of our invested portfolio is in floating rate loans and our gross portfolio yield of 18% compares favorably to the broader listed BDC universe. With that, let me pass it on to Scott Borden for a few remarks.

Speaker 2

Thanks, Umesh. Just wanted to take a minute and talk about the big industry news of late, which has been the apparent approval by the DEA of the HHS's recommendation to reschedule cannabis. This has been a widely anticipated move since the HHS announcement last year. The process timeline, however, is uncertain and could take up to several years to complete if met with challenges seeking judicial review and or administrative hearings. The change, however, would have a major impact on company cash flows through the elimination of the 280E tax effect.

Speaker 2

While we view the news as positive, like all legislative initiatives in the cannabis realm, the devil remains in the detail around both timing and implementation. Given the myriad of ambiguities with respect to that, we believe that the current dynamic of capital constraints in the industry will be largely unchanged, nor do we extrapolate anything further on the regulatory front because of the rescheduling process. SAFER Act and other pending pieces of reform will muddle as usual and continue to be subject to all of the same vagaries obstacles that have been present for some time. As such, we take a mildly optimistic view of the news and maintain some hope that perhaps this time is different. On balance, it's clearly a step in the right direction.

Speaker 2

With that, I'll pass back to Umesh.

Speaker 1

Thank you, Scott. That's all we had in terms of prepared remarks. We can take questions. Is there anything, Gigi? Thank

Operator

Our first question comes from the line of Michael Lavery from Piper Sandler.

Speaker 3

Thank you. Good morning.

Speaker 1

Good morning, Michael.

Speaker 3

Regarding the transaction, can you just touch on how it's progressing and maybe if there's any regulatory review updates or just your sense of what we should expect as far as that moves along?

Speaker 1

Yes, sure. So we have submitted a N14 statement to the SEC for the review on April 15. That N14 is a document that would be used as a proxy as well as providing information on the transaction. We are expecting that process to take another month or 2. It is difficult to estimate the exact time it will take for the completion of SVB's review.

Speaker 1

But following that review, we will be taking the shareholder vote. So everything is in terms of the ongoing process for approval, everything is going as we had anticipated. We think we should get comments from SCC on the document in short order, just to know exactly when. And we still think that we should be expecting a close on this transaction sometime at this hour.

Speaker 4

Sort of

Speaker 3

in the spotlight in the industry in recent days. Can you give a sense of what the implications would be expected to be for you guys in particular and just how the ramifications of that might look for you?

Speaker 1

Yes. I mean, as Scott mentioned in his remarks, there is clearly the implication of the 280E on the cannabis operators and it's an extremely positive one. So the first impact really from our perspective is that our portfolio companies, both the companies that we have in our portfolio right now as well as the companies that are or the borrowers that are in the anticipated portfolio acquisition are going to have much better cash flows and the credit metrics are going to look different. So that's a positive. In terms of overall dynamic, the competitive dynamic for the lending industry, which we operate in, We do not think that just the announcement and even the ultimate passing of 280E is really going to change the dynamic from a supply and demand for capital for the cannabis operators.

Speaker 1

We do not expect the floodgates for capital to open up with this announcement or even with the passing of 280E. And as a result, at least over the next couple of years, we do not anticipate a significant change in either the yields or the overall competitive dynamic. And we do think that the news has led most of the cannabis players to rethink their growth plans. The industry continues to grow pretty rapidly and the operators the good operators are definitely rethinking, revisiting their plans and they're going to need the capital and we will be there to support them. So from our perspective, we think it's a positive for our credit metrics of our borrower companies.

Speaker 1

We think the dynamics, the competitive dynamic doesn't change for us in the near term or definitely over the next year or 2. And it's positive in the sense that the operators are getting better and are going to start talking about their growth plans in much more earnest.

Speaker 3

Okay, great. Thank you so much.

Operator

Thank you. One moment for our next question. Our next question comes from the line of Pablo Zuaneck from Zuaneck and Associates.

Speaker 1

Hey, Pablo. Good morning.

Speaker 4

Good morning. Thank you. Look, two quick questions. One, a follow-up to the prior question. Of course, the 280 news and re scheduling is all positive, right?

Speaker 4

But does that mean that a lot of operators maybe go on a wait and hold pattern for now and don't engage until there's more clarity on when that's implemented and on the 280 benefits. I realize that in some states, right, they may go regs, so they may need expand, although some of them may already have capacity there. So I'm just wondering whether we have a period, maybe almost 1 year, where the demand side, it's weakened temporarily. I don't know if you want to comment on that. And then the second well, let's start with that first.

Speaker 4

Thanks.

Speaker 1

Yes, I'll take that Pablo.

Speaker 2

Look, I think we've already seen that dynamic since the announcement the initial announcement by HHS of the recommendation to switch to reschedule to Schedule 3. And so this has definitely been the backdrop of the market since that announcement, whatever it was 4 or 5 months ago. And look, I think there's obviously some degree of hope and an expectation among the operators and our borrowers that this news will sort of drive down borrowing costs and kind of open the floodgate of capital into the market. As Umesh just alluded to, we just don't see that. I think there are many impediments of the capital constraints in the marketplace and 280E wasn't really sort of among the major factors.

Speaker 2

The federal illegality and just the nature of the complexity of the industry, I think are the barriers of keeping capital from coming in and that's unchanged. So I think, yes, you're right that there might be some level of companies out there that might opt to take a more sort of patient wait and see approach with the belief that better terms are sort of coming if they do that. But I also think a lot of the companies that we speak to sort of accept the sober reality of what has been the history of disappointment on many of the legislative things that have happened in the industry. And I think if capital is available to them, they'll take it. So a mixed bag, but yes, I could see on the margin where this might take another sort of 3 to 6 months of needing to play out for some folks who might want to stay on the sidelines.

Speaker 2

But we think ultimately you can't wait forever and many of the operators have already been waiting for a fairly long time. So those that have real kind of expansion plans and need that growth capital, I think, don't have a choice.

Speaker 4

Understood. And then just on a separate subject, in terms of the transaction structure, maybe just to clarify, obviously, Chicago Atlantic, it's a group, right? And your transaction is a group, the holding company. It has nothing to do with the REIT that's a public listed vehicle. But I'm just trying to understand in terms of what's public information.

Speaker 4

Is the idea that, that becomes a bit of a sister company for you that you work together, you coordinate? I'm referring to a REIT or that's just a totally separate organization and your transaction is really with the holding company?

Speaker 1

The 2 are completely separate, Pablo. You're right. They're completely separate. And yes, they're separate. The read is a completely independent entity from the VDC.

Speaker 4

All right. Okay. That's all I have. Thank you.

Operator

Thank you. At this time, I'm showing no further questions. I would now like to turn the conference back over to Umesh Mahajan for closing remarks.

Speaker 1

Well, thank you everyone for joining us for this call. We look forward to keep giving you updates on the transaction and look forward to speaking with you again in the next earnings call. Thank you very much.

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